The global brent crude oil prices have fallen significantly in the recent weeks from $86.29 to $63.3 per barrel.
With this, Indian petrol and diesel prices have also fallen slightly, while the rupee has strengthened against the dollar.
What are the driving factors?
Trump’s sanctions on Iran have not had a huge impact on Iran's oil production.
This may be because Trump has permitted Iran’s largest customers (Japan, China, and India) to continue buying oil temporarily.
Importantly, Saudi Arabia and other major oil producers have been holding back production of oil since 2017.
But these have now started to produce oil in ample amounts in order to ease consumer worries.
Trump’s pressure on Saudis to avoid production cuts has further pushed the price slump.
Alongside, there is also a surge in crude output at three biggest producers - US, Russia, and China.
Output has also risen in Libya, despite continuing warfare.
It has also remained better than expected in Venezuela, another troubled country.
Volumes of oil held in storage tanks around the world are beginning to build again.
What are the implications?
The fall in prices has been a dramatic shift of sentiment in just about a month. Traders, thus, fear another supply glut amid dimming demand prospects.
As, a protracted US-China trade war is seen as negative for oil demand.
Car sales in China as well as India have also slowed this year, hurting fuel demand.
The price fall reminds of the industry-rattling crash in 2014, a big worry for members of Organization of Petroleum Exporting Countries (OPEC).
Notably, the economies of these countries are closely tied to oil revenues.
India - Lower oil prices mean that India’s oil import bill in 2018-19 would be lower than predicted before.
This, in turn, would mean
less pressure on rupee
narrowing current account deficit
lower subsidy payout
higher public resources for other welfare projects
lower risk of inflation
increased room for RBI to cut interest rate
The rupee, which was also hovering above 74 a dollar, has gained and is now below 72.
Notably, variation in exchange rate by one rupee changes oil import by Rs 6,639 crore.
These two factors of global crude oil prices and exchange rate are the major contributors to retail fuel prices in India.
How does the future look?
Saudi has said production cut of about 1 million barrels a day from October, 2018 levels is needed to deal with current imbalance.
Saudi Arabia will never let a glut build again in future.
But it may struggle to persuade producers like Russia and Iraq to join in making cuts.
Saudi has to balance between pressures from Trump administration for lower oil prices and its own economy’s need for higher revenues.
The OPEC is expected to decide on a supply cut of 1-1.4 million barrels per day when it meets next in Vienna in a month.
